Willi B B illiWilli B B illigg

TECHNOLOGY PUBLIC POLICYMAKINGTECHNOLOGY PUBLIC POLICYMAKING

Class Four, Part Two: The N S i Ch ll f

Class Four, Part Two: The N S i Ch ll fNNewew SServerviicesces ChChaallllengeenge ffromrom

GlobalizationGlobalization GlobalizationGlobalization

WilliWilliamam BB.. BBonvonvilliillianan

Director, MIT WashinDirector, MIT Washinggton Officeton Office

SEMINAR:SEMINAR: SEMINAR:SEMINAR:

FUNDAMENTALS OF SCIENCEFUNDAMENTALS OF SCIENCE ANDAND

1

TECHNOLOGY PUBLICTECHNOLOGY POLICYMAKINGPUBLIC POLICYMAKING

��

� Low labor costs abroad� Availability of highly-education labor� Low labor costs abroad � Availability of highly-education labor

Offshoring Drivers:Offshoring Drivers:

� Services 70%+ of US GDP; offsets US trade deficit in goods

� Services 70%+ of US GDP; offsets US trade deficit in goodsdeficit in goods

� US now shifting R&D offshore – innovation effect?

deficit in goods � US now shifting R&D offshore – innovation

effect?effect?� Drivers of Offshore Outsourcing:

IT availability worldwide

effect? � Drivers of Offshore Outsourcing:

IT availability worldwide� IT availability worldwide� IT availability worldwide

� Availability of highly education labor� Foreign gov’t subsidies, weak regulatory regimes� Offshore partnering mechanisms now widespread

� Availability of highly education labor � Foreign gov’t subsidies, weak regulatory regimes � Offshore partnering mechanisms now widespread

2

p g p� Access to new and large markets

p g p � Access to new and large markets

gg

((

Ron Hira (Rochester Institute of Technology), “I li ti f Off h O t i ”Ron Hira (Rochester Institute of Technology), “I li ti f Off h O t i ”“Implications of Offshore Outsourcing” (1/23/04)“Implications of Offshore Outsourcing” (1/23/04)

� Debate: classical economics – offshoring is win-� Debate: classical economics – offshoring is win-win for US and nations gaining jobs vs.

� Will be winners and losers in the US (Hira’s win for US and nations gaining jobs vs.

� Will be winners and losers in the US (Hira’s view)

Definitions –view)

Definitions –Definitions� Outsourcing Definitions

– co. decides to no longer make part or all of product or process in house - will

� Outsourcing – co. decides to no longer make part or all of product or process in house - willpart or all of product or process in house willpurchase it from another entity

� Offshore Outsourcing – companies outsource

part or all of product or process in house will purchase it from another entity

� Offshore Outsourcing – companies outsource� Offshore Outsourcing companies outsourceoverseas

� Offshoring – multinational moves work from

� Offshore Outsourcing companies outsource overseas

� Offshoring – multinational moves work from 3

� Offshoring multinational moves work fromdomestic sites to foreign sites

� Offshoring multinational moves work from domestic sites to foreign sites

t tt t

“bli d f ith” if i i i d f

“bli d f ith” if i i i d f

pp

Offshore Outsourcing: (Hira)Offshore Outsourcing: (Hira)OffshoreOffshore Outsourcing:Outsourcing: (Hira)(Hira) �� –– potentially major shiftpotentially major shift in how our economy operates (inin how our economy operates (in

the service sector)the service sector) �� Positive: lower costs of products and services by loweringPositive: lower costs of products and services by lowering

input costs; expand and open new markets abroadinput costs; expand and open new markets abroad �� Negative:Negative:�� jjobsobs createdcreated abroadabroad bbyy tthishis aarere atat thethe eexpensexpense ofofNegative:Negative: jobsjobs createdcreated abroadabroad byby thisthis areare atat thethe expenseexpense ofof

domestic employment; domestic jobs are lostdomestic employment; domestic jobs are lost and notand not replacedreplaced

InnovationInnovation effects:effects:InnovationInnovation effects:effects: �� USUS economic competitiveness dependent on innovationeconomic competitiveness dependent on innovation

system and innovation capacity –system and innovation capacity – tthese could be affectedhese could be affected �� “bli“blinndd ffaaith”ith” –– ifif communcommun iicacatitions, semons, semiiconcondducucttor mor mffg.g.

electronic devices, and other key technological capabilitieselectronic devices, and other key technological capabilitieslost, USlost, US will move on to “next big thing”will move on to “next big thing”

�� IfIf next big thing isnext big thing is nanotechnology, China isnanotechnology, China is second largestsecond largestproducer ofproducer of technical papers intechnical papers in this area behind the USthis area behind the US andand ahead of Jaahead of Jappanan

4

o so s

kill j b ill t l ti b t l t dkill j b ill t l ti b t l t d

jj

Hira:Hira: CConcludingoncluding Quotes:Quotes:Hira:Hira: ConcludingConcluding Quotes:Quotes: �� “growing consensus that offshore outsourcing of high-“growing consensus that offshore outsourcing of high-

sskillkillss jjoobbs ws willill nono tt onon lly cony contitinuenue bbuutt acceacce lleraeratte ane andd expand to include an ever-widening cluster ofexpand to include an ever-widening cluster of occupatoccupatiioonnss””occupatoccupat

�� “these are not low“these are not low levellevel jjobs that no Americans wouldobs that no Americans would want but high-skill/high value added positions filled bywant but high-skill/high value added positions filled bysome of our best and brightest engineers and computersome of our best and brightest engineers and computerscientistsscientists””scientistsscientists

5

B t k t ’90’ hi h t d d ti it

B t k t ’90’ hi h t d d ti it

Catherine L. Mann, “Globalization of IT S i d Whit C ll J b Th N

Catherine L. Mann, “Globalization of IT S i d Whit C ll J b Th N ttServices and White Collar Jobs: The NextWave of Productivity Growth”, International Services and White Collar Jobs: The Next Wave of Productivity Growth”, International

Economics Policy Briefs, No. PB03-11 (Dec. 2003)

Economics Policy Briefs, No. PB03-11 (Dec. 2003)2003)2003)

Basic Points:� Globalized production of IT hardware led toBasic Points: � Globalized production of IT hardware led to� Globalized production of IT hardware led to

lower prices during the 90’s prompting IT investment and transformation

� Globalized production of IT hardware led to lower prices during the 90’s prompting IT investment and transformationinvestment and transformation.

� This was disruptive to businesses and workersinvestment and transformation.

� This was disruptive to businesses and workers � But – was key to ’90’s higher trend productivity

growth, lower inflation, more employment � But – was key to ’90’s higher trend productivity

growth, lower inflation, more employment

6

��

t tt t

k ff i l ill diff th h th US

k ff i l ill diff th h th US

Globalization of software and enhanced IT use Globalization of software and enhanced IT use

Mann: There will be a Second WaveMann: There will be a Second WaveMann: There will be a Second WaveMann: There will be a Second Wave � Now: “second wave” of productivity growth through an

“international value chain” (ie, produced abroad) will � Now: “second wave” of productivity growth through an

“international value chain” (ie, produced abroad) will( , p )lead to hardware, and now software and services pricedeclines – IT package will be more affordable for firmsTherefore more firms will adopt IT and further drive

( , p )lead to hardware, and now software and services pricedeclines – IT package will be more affordable for firms Therefore more firms will adopt IT and further drive� Therefore more firms will adopt IT and further driveproductivity gains – and employment will increasebecause the software and services produced abroad willbe “knit together” in the US “close to customers”

� Therefore more firms will adopt IT and further drive productivity gains – and employment will increasebecause the software and services produced abroad willbe “knit together” in the US “close to customers”be knit together in the US close to customers

� So: high skill jobs designing and tailoring IT packageswill increase in the IT sector, as will jobs to use these IT

be knit together in the US close to customers � So: high skill jobs designing and tailoring IT packages

will increase in the IT sector, as will jobs to use these IT packages effectively will diffuse throughout the USeconomy

� “Globalization of software and services, enhanced IT use

packages effectively will diffuse throughout the US economy

� “Globalization of software and services, enhanced IT useservices,and transformation activities in new sectors, and jobcreation are mutually dependent. Breaking the links bylimiting globalization of software and services or by

services,and transformation activities in new sectors, and jobcreation are mutually dependent. Breaking the links bylimiting globalization of software and services or by

7

limiting globalization of software and services or byrestricting IT investment … puts robust and sustainableUS economic performance at risk.”

limiting globalization of software and services or byrestricting IT investment … puts robust and sustainableUS economic performance at risk.”

t tt t

d i i i bl d i d

d i i i bl d i d

Mann: When you CutMann: When you Cut through Boom/Bust Cyclesthrough Boom/Bust Cycles

EmploymentEmployment isis thethe SSameameEmploymentEmployment isis thethe SameSame…… �� When you cutWhen you cut through the “boom-bust” peaksthrough the “boom-bust” peaks

andand valleysvalleys ofof thethe ccurrenturrent businessbusiness cyclecycle andand valleysvalleys ofof thethe currentcurrent businessbusiness cyclecycle,,comparing end ofcomparing end of 99 and end of99 and end of 03 data on03 data on employment nos., “employment in architectureemployment nos., “employment in architecture anandd engeng iineerneeriingng iis ss sttaablble -ane -andd iin compun computter aner andd mathematics fields 6% higher, -and businessmathematics fields 6% higher, -and businessandand financialfinancial ooccupationsccupations 9%9% higherhigher ””andand financialfinancial occupationsoccupations 9%9% higherhigher..

�� [Q:[Q: but isn’t the current “jobless recovery”but isn’t the current “jobless recovery”structurallstructurallyy different re: emdifferent re: emyy pppploloyymentmentyy ,,,, so isso is therethere a basis for these figures?]a basis for these figures?]

LaLagggginingg Sectors:Sectors:gggggg �� There are large sectors in the USThere are large sectors in the US economy thateconomy that

are lagging in adopting ITare lagging in adopting IT productivity gainsproductivity gains

8

� Example: Small and Medium Size Businesses (SME’s) slower in adopting IT

� Example: Small and Medium Size Businesses (SME’s) slower in adopting IT

recoveryrecovery

( y );

t t

( y );

t t

Mann: Ex. of Lagging Sector: HealthMann: Ex. of Lagging Sector: Health �� 372372,,000000,, ppppreventable inreventable injjuries and deathsuries and deathsjj pppperer yyearearyy fromfrom

“Adverse Drug Events” (ADE’s)“Adverse Drug Events” (ADE’s)

�� Add between $1.56b and $5.6 b in hospital expenses each yearAdd between $1.56b and $5.6 b in hospital expenses each year �� Bar coding of prescriptions medicines and blood products withBar coding of prescriptions medicines and blood products with

electronic medical recordselectronic medical records could cut ADE’s by 80,000could cut ADE’s by 80,000

TelemedicineTelemedicine improvesimproves patientpatient decreasesdecreases �� TelemedicineTelemedicine improvesimproves patientpatient recoveryrecovery,, decreasesdecreases readmission, cuts costs by 80% by allowingreadmission, cuts costs by 80% by allowing basic medicalbasic medical checks performed at home and transmitted to central data basechecks performed at home and transmitted to central data base

�� Mann’s theory –Mann’s theory – llowering IT services costs will speedowering IT services costs will speed

introduction of these productivity gainsintroduction of these productivity gains into IT lagginginto IT lagging healthhealth

[Other ex’s of lagging IT adaptors:[Other ex’s of lagging IT adaptors: �� entertainmententertainment ((whwhyy not email instead of snailmail netflixs?not email instead of snailmail netflixs? ););

government ]government ]

�� --Assumption: lagging sectors will be prone to adopt IT based--Assumption: lagging sectors will be prone to adopt IT based

d td tii ii ii iiff ii t??]t??]

9

productivity savings if prices cut --- correcpro t??]ductivity savings if prices cut --- correct??]

t tt t

nn – –

i d ft i th thi d ft i th th

Catherine Mann, Prof. of Economics, Brandeis

Mann’s Conclusions:Mann’s Conclusions:

� Thesis – IT services will be done abroad, but higher� Thesis – IT services will be done abroad, but higher, gpaid jobs demanding IT skills will grow quickly aswell in the US with lower costs speeding theirintroduction (particularly i lagging sectors) and

, g paid jobs demanding IT skills will grow quickly aswell in the US with lower costs speeding theirintroduction (particularly i lagging sectors) andintroduction (particularly in lagging sectors) andtherefore the, introduction (particularly in lagging sectors) and therefore the,

� “potential increase in investment, productivitygrowth, and job creation from the globalization of IT

� “potential increase in investment, productivitygrowth, and job creation from the globalization of IT services and software is even greater than thatexperienced in the 1990’s” services and software is even greater than that experienced in the 1990’s”

10

o no n

gg g p

t t t

gg g p

t t t

Questions Re: Mann and Hira:Questions Re: Mann and Hira: � Q: Where do you come down in the Mann-Hira debate? � Q: will lower IT services/software costs from shifting

prod ction abroad speed introd ction f IT i l

�

agging USagging

Q: Where do you come down in the Mann-Hira debate? � Q: will lower IT services/software costs from shifting

prod ction abroad speed introd ction f IT i l USproduction abroad speed introduction of IT in lagging USIT sectors? Or are there other barriers that explain whylagging sectors haven’t adop

prod

ted?

uction abroad speed introduction of IT in lagging US IT sectors? Or are there other barriers that explain whylagging sectors haven’t adopted?

�� Q:Q: Why won’t the “high skill” IT services work be doneWhy won’t the “high skill” IT services work be doneabroad via the internet as well lower skill services, sinceabroad via the internet as well lower skill services, since USUS hh dd lili ii ll dd ??US has declining talent advantage?

� Q: what about the potential loss in innovation capacity byloss of the engineering design and R&D work related

US

to

has declining talent advantage? � Q: what about the potential loss in innovation capacity by

loss of the engineering design and R&D work related to

gain experience to move up the skill chain to higher endITgain experience to move up the skill

jobs, even if high end IT jobs don’t move abroad?chain to higher end

IT jobs, even if high end IT jobs don’t move abroad?

loss of the engineering design and R&D work related toIT software and services shifted abroad?

� Q: If entry level IT jobs shift abroad, where will

loss

workers

of the engineering design and R&D work related to IT software and services shifted abroad?

� Q: If entry level IT jobs shift abroad, where will workers

11

u Sa ue so sa s e as a a a ca o be au Sa ue so sa s e as a a a ca o be a

re Globalization: re Globalization:

p pp p

Paul A. Samuelson, Prof. Of Economics, MIT (Nobel Prize 1972), “Where Ricardo and Mill Rebut and Confirm Arguments ofPaul A. Samuelson, Prof. Of Economics, MIT (Nobel Prize 1972), “Where Ricardo and Mill Rebut and Confirm Arguments ofWhereWhere

Perspectives, 18, No. 3 (Summer 04)Perspectives

re Globalization:re

Vol., Vol. 18, No. 3 (Summer 04)

� Mainstream economists (Alan Greenspan, Jagish Bhagwati,Gregory Mankiw, etc.) argue

� Mainstream economists (Alan Greenspan, Jagish Bhagwati,Gregory Mankiw, etc.) argue Globalization:

RicardoRicardo andand MillMill RebutRebut andand ConfirmConfirm ArgumentsArguments ofof Mainstream Economists SupportingMainstream Economists Supporting Globalization”,Globalization”, Jour. of EconomicJour. of Economic

PerspectivesPerspectives VVolol 1818 NoNo 33 ((SummerSummer 04)04)

GregoryGregory Mankiw,Mankiw, etc.)etc.) argueargue �� “Yes, good“Yes, good jobs may be lost in the shortjobs may be lost in the short run,run, but still total USbut still total US

net national product must by economic laws of comparativenet national product must by economic laws of comparativeadvantageadvantage bebe raisedraised iinn tthehe longlong runrun ((andand inin China,China, too)….too)….advantageadvantage bebe raisedraised inin thethe longlong runrun (and(and inin China,China, too)….too)….Never forgetNever forget the real gains of consumersthe real gains of consumers alongside admittedalongside admittedpossible losses of some producerspossible losses of some producers in this working out of whatin this working out of whatSchumSchumppeter called ‘creative caeter called ‘creative cappitalist destruction.italist destruction.

�� Correct economic law recognizes that some American groupsCorrect economic law recognizes that some American groupscan be hurtcan be hurt by dynamic freeby dynamic free trade.trade. But correctBut correct economic laweconomic law vindicates the word ‘creative’ destructionvindicates the word ‘creative’ destruction bbyy itsitsyy pproof that theroof that theppgains of the American winners are big enough to more thangains of the American winners are big enough to more thancompensate the losers.”compensate the losers.”

�� BBuutt SaSammueuellsosonn sayssays: “: “TThhee ll asastt paparragagrrapaphh cacann oonlnlyy bebe aann

12

y p g p yinnunendo For it is dead wrong about the necessary supply ofwinnings over losings”

y p g p yinnunendo For it is dead wrong about the necessary supply ofwinnings over losings”

””

C ’ f “C ’ f “’ “ ’ “

orever

orever –

o

–

o

p yp y

Samuelson: Capturing C i AdSamuelson: Capturing

C i AdComparative AdvantageComparative Advantage � Q: How can the US be a loser in trade with a low cost, low� Q: How can the US be a loser in trade with a low cost, low

wage competitor like China despite the Ricardo s theory ofcomparative advantage”?

� A: Ex.: If China begins to make productivity enhancing gains

wage competitor like China despite the Ricardo s theory of comparative advantage”?

� A: Ex.: If China begins to make productivity enhancing gains� A: Ex.: If China begins to make productivity enhancing gainsin its production, and couples that with its low wages, it cancapture some of the comparative advantage that belonged to the US through its productivity dominance [note: US still the

� A: Ex.: If China begins to make productivity enhancing gainsin its production, and couples that with its low wages, it cancapture some of the comparative advantage that belonged to the US through its productivity dominance [note: US still thethe US through its productivity dominance [note: US still themost productive economy in the world]

� Then -- in a Ricardo analysis, there is never anyunemployment that lasts f from trade “So it is not

the US through its productivity dominance [note: US still the most productive economy in the world]

� Then -- in a Ricardo analysis, there is never anyunemployment that lasts f from trade “So it is notunemployment that lasts forever from trade So it is notthat US jobs are ever lost in the long run; it is that the newlabor-market clearing real wages has been lowered by thisversion f dynamic fair trade ”

unemployment that lasts forever from trade So it is not that US jobs are ever lost in the long run; it is that the newlabor-market clearing real wages has been lowered by thisversion f dynamic fair trade ”version of dynamic fair trade.

� In other words, US wages can drop after a time to a pointwhere China’s productivity enhancement is offset. The US

version of dynamic fair trade. � In other words, US wages can drop after a time to a point

where China’s productivity enhancement is offset. The US

13

still has a benefit from lower prices for goods, but there arenow “new net harmful US terms of trade”still has a benefit from lower prices for goods, but there arenow “new net harmful US terms of trade”

tt

Samuelson: Economic history is replete with the story of capturingSamuelson: Economic history is replete with the story of capturingreplete with the story of capturingcomparative advantage:replete with the story of capturing comparative advantage:p gp g � Example: Farming moves from east US to

midwest two centuries ago� Example: Farming moves from east US to

midwest two centuries ago � Example: Textile and shoe mfg. moved from

new England to the low-wage South early last � Example: Textile and shoe mfg. moved from

new England to the low-wage South early last century

� Example: English mfg. leadership shifted to the century

� Example: English mfg. leadership shifted to theUS starting in the middle of the 19th century

� “Even where the leaders continued to progress US starting in the middle of the 19th century

� “Even where the leaders continued to progressin absolute growth, their rate of growth tended tobe attenuated by an adverse headwind

d f l tit d th

in absolute growth, their rate of growth tended tobe attenuated by an adverse headwind

d f l tit d th 14

generated from low wage competitors and other technical imitators.”generated from low wage competitors and other technical imitators.”

oo

g p [

“ f ”

g p [

“ f ”“ ” “ ”

g gg g

Samuelson’s conclusions:Samuelson’s conclusions: � So: “a productivity gain in one country can benefit that country

alone while permanently hurting the ther country by� So: “a productivity gain in one country can benefit that country

alone while permanently hurting the ther country byalone, while permanently hurting the other country byreducing the gains from trade possible between the twocountries” – all this is “long run Schumpeterian [the creative

alone, while permanently hurting the other country by reducing the gains from trade possible between the twocountries” – all this is “long run Schumpeterian [the creative destruction of capitalism] effects”destruction of capitalism] effects”

� There is a roulette wheel of evolving comparative advantagein a world of free trade

� There is a roulette wheel of evolving comparative advantagein a world of free trade

� “Comparative advantage cannot be counted on to create…net gains greater than the net losses from trade”

� “Comparative advantage cannot be counted on to create…net gains greater than the net losses from trade”

� But if you respond with tariffs and protectionism, you may be� But if you respond with tariffs and protectionism, you may be

15

breeding “economic arteriosclerosis”breeding “economic arteriosclerosis”

tt

th th di l bth th di l b

are

are

William J. Raduchel (VP, CTO, AOL-Time Warner, former CSO, Sun), “The Economics of

William J. Raduchel (VP, CTO, AOL-Time Warner, former CSO, Sun), “The Economics ofWarner, former CSO, Sun), The Economics ofSoftware” (2004-draft report for National Academies of Sciences STEP

Board)

Warner, former CSO, Sun), The Economics of Software” (2004-draft report for National Academies of Sciences STEP

Board)))

� Software: core of most modern organizations� Largest single class of assets in the world� Software: core of most modern organizations � Largest single class of assets in the worldg g� Operating, maintaining and creating software is

the largest class of expenses for the modern

g g � Operating, maintaining and creating software is

the largest class of expenses for the modern corp. other than direct labor

� Software and the business practices it supportsthe biggest driver of productivity growth

corp. other than direct labor � Software and the business practices it supports

the biggest driver of productivity growthare the biggest driver of productivity growth� “Software embodies the knowledge and practice

by which the organization performs its mission

are the biggest driver of productivity growth � “Software embodies the knowledge and practice

by which the organization performs its missionby which the organization performs its mission,and consists of both design and implementation”

� Software determines the enterprise planning

by which the organization performs its mission,and consists of both design and implementation”

� Software determines the enterprise planning

16

p p gsystems that set how a factory will run

p p gsystems that set how a factory will run

g

t t t t t t

g

t t t t t t

g p g g g p

f th US h t i ti t

g p g g g p

f th US h t i ti t

b dd d i it i f ti t

b dd d i it i f ti t

Raduchel: Key Role of SoftwareRaduchel: Key Role of SoftwareRaduchel: Key Role of SoftwareRaduchel: Key Role of Software � Harvard economist Dale Jorgenson: for most OECD� Harvard economist Dale Jorgenson: for most OECD

economies software was the major source of increasedinvestment in knowledge during the past decadeUS L b D B f L b S ’ i i d h t 8 f

economies software was the major source of increasedinvestment in knowledge during the past decade US L b D B f L b S ’ i i d h t 8 f� US Labor Dept. Bur. of Labor Stat’s anticipated that 8 ofthe 10 fastest US occupations will be computer related, with software engineers comprising the largest group

� US Labor Dept. Bur. of Labor Stat’s anticipated that 8 of the 10 fastest US occupations will be computer related, with software engineers comprising the largest group

� --This prediction is at risk given the way India and Chinaare upgrading their economies by outsourcing these jobs

� --This prediction is at risk given the way India and Chinaare upgrading their economies by outsourcing these jobs from the US, where computer science continues to decline in popularity as a field of study

� A firm is an information system – of highly decentralized

from the US, where computer science continues to decline in popularity as a field of study

� A firm is an information system – of highly decentralized� A firm is an information system of highly decentralizedcomputing by fallible agents (people) -- software defines the information system, so the value of a firm is largely

� A firm is an information system of highly decentralized computing by fallible agents (people) -- software defines the information system, so the value of a firm is largely

17

embedded in its information systemembedded in its information system

t d b diff t t ti f diff t dt d b diff t t ti f diff t d

o very s

o very s

created by different teams over time for different purposes andbrought together for the unique task at hand

� individual parts of the software don’t matter, it’s the entire stack –and EVERY part f the stack has to function well otherwise it’

created by different teams over time for different purposes and brought together for the unique task at hand

� individual parts of the software don’t matter, it’s the entire stack –and EVERY part f the stack has to function well otherwise it’

18

and EVERY part of the stack has to function very well otherwise it sworthlessand EVERY part of the stack has to function very well otherwise it s worthless

Raduchel: Software looks remarkably easyRaduchel: Software looks remarkably easyremarkably easy…remarkably easy… � but the problem is making it error free, robust against change,

scaleable to high volumes and seamlessly integrated with many� but the problem is making it error free, robust against change,

scaleable to high volumes and seamlessly integrated with manyscaleable to high volumes, and seamlessly integrated with manyother firm software system in real time

� The software stack on a modern PC is probably the most complex good every created by man – average corporate IT system is far

scaleable to high volumes, and seamlessly integrated with manyother firm software system in real time

� The software stack on a modern PC is probably the most complex good every created by man – average corporate IT system is farg y y g p ymore complicated than the Space Shuttle or Apollo project

� Bill Joy – the spiraling complexity of putting “Star Wars” scalesoftware on the desktop

g y y g p ymore complicated than the Space Shuttle or Apollo project

� Bill Joy – the spiraling complexity of putting “Star Wars” scalesoftware on the desktop

� There is no other item we own that is as confusing and unreliable as our PC – the hardware works well, it’s the software

� There is no other item we own that is as confusing and unreliable as our PC – the hardware works well, it’s the software

Software is a “Stack”� Software is a “stack” composed of multiple layers of software Software is a “Stack” � Software is a “stack” composed of multiple layers of software

l i bl h h ’t d t dl i bl h h ’t d t d

systems t ssystems t s

Raduchel: Software developmentRaduchel: Software development � -The best software developers are orders of magnitude better than the

average developer� -About 100 to 200 developers worldwide end up writing the software we

� -The best software developers are orders of magnitude better than theaverage developer

� -About 100 to 200 developers worldwide end up writing the software we use

� -Maurice Halstead: one attribute of the human brain drives programming ability

use � -Maurice Halstead: one attribute of the human brain drives

programming ability � no one can solve a programming problem he or she can’t understand� Average developer has about 250 “Halstead lengths” � Wizard programmers have Halstead lengths of 65,000

� no one can solve a programming problem he or she can’t understand � Average developer has about 250 “Halstead lengths” � Wizard programmers have Halstead lengths of 65,000

Economics of software � -Different from anything elseEconomics of software � -Different from anything else� Different from anything else� -Not a factor of production like labor or capital � -Instead it defines the production function � -It improves by making itself more complex - raising risk of catastrophic loss

� Different from anything else � -Not a factor of production like labor or capital � -Instead it defines the production function � -It improves by making itself more complex - raising risk of catastrophic lossp y g p g p� -Economists, lawyers, accountants don’t properly value or account for

software� -It is a tool without value in itself, but it creates huge potential value through in

the i i built for

p y g p g p � -Economists, lawyers, accountants don’t properly value or account for

software � -It is a tool without value in itself, but it creates huge potential value through in

the i i built for

19

the systems it is built for� -We account for it as a periodic expense but in reality it adds assets and

liabilities

the systems it is built for � -We account for it as a periodic expense but in reality it adds assets and

liabilities

��

qq

t tt t

C f i t i i d dif i f iC f i t i i d dif i f i

Has to be 7 to 10 because of Has to be 7 to 10 because of

Raduchel: Making softwareRaduchel: Making software � The specification for the software is without meaning –

the only specification is the stack itselfQuality of the designer is 90% of the quality of the

� The specification for the software is without meaning –the only specification is the stack itself Quality of the designer is 90% of the quality of the� Quality of the designer is 90% of the quality of thesoftware design

� Best way to cut software costs and improve features is toincrease the alit of the designer

� Quality of the designer is 90% of the quality of the software design

� Best way to cut software costs and improve features is toincrease the alit of the designerincrease the quality of the designer

� Cutting the development schedule requires a many foldincrease in staff

increase the quality of the designer � Cutting the development schedule requires a many fold

increase in staff � Adding more staff guarantees later delivery� Value of software is often unrelated to cost � Adding more staff guarantees later delivery � Value of software is often unrelated to cost � Cost of maintaining and modifying software increases

over time and with accumulated changes � Has to be replaced every 7 to 10 years because of

� Cost of maintaining and modifying software increases over time and with accumulated changes

� Has to be replaced every 7 to 10 years because ofreplaced every yearsaccumulated changes and platform evolution

� Source code, is the least valuable part of software sogiving it away is good strategy because it is irrelevant and

replaced every yearsaccumulated changes and platform evolution

� Source code, is the least valuable part of software sogiving it away is good strategy because it is irrelevant and

20

giving it away is good strategy because it is irrelevant andcan promote new innovation [IBM-Microsoft Linix vs.Windows open source battle]

giving it away is good strategy because it is irrelevant and can promote new innovation [IBM-Microsoft Linix vs.Windows open source battle]

��

t

t

Raduchel: Software – value/liabilityRaduchel: Software – value/liabilityRaduchelRaduchel:: SoftwareSoftware value/liabilityvalue/liability

enabler:enabler: �� -Software programming phase is-Software programming phase is only 10% ofonly 10% of thethe

softwaresoftware –– thethe iimplementationmplementation isis anan intangibleintangible softwaresoftware thethe implementationimplementation isis anan intangibleintangible asset of potentiallyasset of potentially enormousenormous valuevalue itsits�� vvaluealue growsgrows wwithith tthehe operationsoperations andand pprospectsrospects --itsits valuevalue growsgrows withwith thethe operationsoperations andand prospectsprospects

ofof those business operationsthose business operations �� itit–– iiitit ii lls as allso aso a hhuge pouge pott titienentitiaall lili bbaa ilitilitbilitbilityyhh ll llii

21

g gg g

US t di ti t l f t h

US t di ti t l f t h

Richard B. Freeman, Harvard Eco. Chair,Richard B. Freeman, Harvard Eco. Chair, ““DoesDoes GlobalizationGlobalization ooff tthehe ScientificScientificDoesDoes GlobalizationGlobalization ofof thethe ScientificScientific Engineering Workforce Threaten USEngineering Workforce Threaten US

EE ii LL dd hihi ?? (6/05(6/05 NBER)NBER)EEconomconomiicc LLeaeaddersershihipp?? (6/05(6/05 NBER)NBER)

�� US has been world sci/tech leader since WW2US has been world sci/tech leader since WW2

�� Only 5% of world population,Only 5% of world population, US employs 1/3US employs 1/3of world science and enof world science and enggineerinineeringg researchersresearchers

�� US accountsUS accounts for 40% of world R&D, 35% offor 40% of world R&D, 35% of

S&ES&E articlesarticlesS&ES&E articlesarticles �� 17 of top 20 world universities in the US17 of top 20 world universities in the US �� USUS exporexpor tts ares are didisproporsproportitionaonatteellyy ffromrom ttecechh

sectorssectors

22

y g g

f i b t fill k

y g g

f i b t fill k

t i lik Chi d I di t ith USt i lik Chi d I di t ith US

Th t t d t diti l th/ th tt f

Th t t d t diti l th/ th tt f

Freeman, Con’tFreeman, Con’t �� USUS share ofshare of sci/engineering degrees ofsci/engineering degrees of all types isall types is

falling fastfalling fast �� S&ES&E PhD’s from Europe and Asian Univ’sPhD’s from Europe and Asian Univ’s

increased, while USincreased, while US PhD’s nos. stagnatePhD’s nos. stagnate �� USUS reliance on foreign born PhD’s increasedreliance on foreign born PhD’s increased

�� Job market forJob market for yyounoungg scientists/enscientists/en ggineers worsenedineers worsened compared tocompared to other high level job occupations -other high level job occupations -discourages US students from entry, but attractsdiscourages US students from entry, but attracts fforeoreiigngn bbornorn ttoo fillfill ranran kkss

�� ByBy increasing no. ofincreasing no. of sci/engineers lower incomesci/engineers lower income councounttrriieses liklikee ChiChina anna andd IInndidia can compea can compette we withith USUS inin technically advanced industriestechnically advanced industries �� ThThreareattensens tto uno unddoo ttraraditiditionaonall nornor th/th/sousouthth papa ttttern oern off

trade where advanced dominate high techtrade where advanced dominate high tech 23

��

t tt t

US f l iti l

US f l iti l

i i i d h i d i

i i i d h i d i

Freeman, Con’tFreeman, Con’t,,�� Declining comparativeDeclining comparative advantage in high-techadvantage in high-tech

willwill createcreate sseriouserious adjustmentadjustment problemsproblems ffororwillwill createcreate seriousserious adjustmentadjustment problemsproblems forfor the USthe US

OffshoringOffshoring ooff IITT jjobsobs toto IndiaIndia growthgrowth ofof highhigh�� OffshoringOffshoring ofof ITIT jobsjobs toto IndiaIndia,, growthgrowth ofof highhigh tech imports from China are harbingerstech imports from China are harbingers

�� USUS ffaces aaces a llongong ttransransitiitionon tto ao a llessess dominant positiondominant position inin science andscience and engengiineerneeriing-assocng-associiateatedd tectec hh iinnddustrustriies,es, around which wearound which we have centered ourhave centered our comparative advantagecomparative advantage of the past halof the past halff--centurycentury

24

p yp y

s

s

Carl Dahlman & Anuja Utz,Carl Dahlman & Anuja Utz, India and the KnowledgeIndia and the Knowledge

EconomyEconomy ((WorldWorld BBankank 2005)2005) EconomyEconomy (World(World BankBank 2005)2005)

�� India’sIndia’s ppovertovertyy incidence down form 44% inincidence down form 44% in

80’s to 26% in ‘0080’s to 26% in ‘00

�� ForeignForeign DirectDirect IInvestmentnvestment -- 3rd3rd inin worldworld3rd3rd inin worldworld,,�� ForeignForeign DirectDirect InvestmentInvestment $4.6b$4.6b in ‘03 (China #1 = $55b)in ‘03 (China #1 = $55b)

IndiaIndia’’ GGDPDP growth;growth; 88 2%2% inin 0202 0303�� IndiaIndia ss GDPGDP growth;growth; 88..2%2% inin 0202--0303 �� From 97-03: Agriculture down toFrom 97-03: Agriculture down to 22%22% offoff

GDP, Mfg. steadyGDP, Mfg. steady at 17% (mfg. job growthat 17% (mfg. job growth

only 2% a year); Services up to 50.8%only 2% a year); Services up to 50.8%

25 � India=17% of world pop., 2%of world GDP� India=17% of world pop., 2%of world GDP

��

m

m

t

t

G i IT i d bili

G i IT i d bili

Dahlman & Utz, Con’tDahlman & Utz, Con’t,,� Global knowledge economy - knowledge has

become key driver of economic success� Global knowledge economy - knowledge has

become key driver of economic successbecome key driver of economic success� India’s advantages:

Base of well educated skilled talent in sciences

become key driver of economic success � India’s advantages:

Base of well educated skilled talent in sciences� Base of well-educated, skilled talent in sciences� Democratic system

Stable acroeconomic factors

� Base of well-educated, skilled talent in sciences � Democratic system

Stable acroeconomic factors� Stable macroeconomic factors� Widespread use of English

S d fi i l

� Stable macroeconomic factors � Widespread use of English

S d fi i l� Sound financial sector� Diversified S&T sector� Sound financial sector � Diversified S&T sector

� Growing IT services sector and capability� Software & IT services exports+$12.5b/yr. in 04

� Growing IT services sector and capability � Software & IT services exports+$12.5b/yr. in 04

26

� IT is now over 4% of India’s GDP� IT is now over 4% of India’s GDP

g g yg g y

New National Innovation Foundation for R&DNew National Innovation Foundation for R&D

Dahlman & Utz, Con’tDahlman & Utz, Con’t � India’s IT services - unique strategy; difference fro

traditional low then high end mfg. tried by Taiwan, � India’s IT services - unique strategy; difference fro

traditional low then high end mfg. tried by Taiwan, Korea, China - india trying toally new model focusedon services exportsKorea, China - india trying toally new model focusedon services exports � Hyderabad is “cybercity”� India destination for R&D for 100 multinationals -� Hyderabad is “cybercity” � India destination for R&D for 100 multinationals -

ex., GE: 1800 tech ee’s, 600 are PhD’s� New S&T funds for India to spur innovation and

ex., GE: 1800 tech ee’s, 600 are PhD’s � New S&T funds for India to spur innovation and

R&D� Biotechs and pharmas emerging in drug discover

R&D � Biotechs and pharmas emerging in drug discover � New IP laws� New “National Innovation Foundation” for R&D� New IP laws � New “National Innovation Foundation” for R&D

27

g yg y

y p py p p

Dahlman & UtzDahlman & Utz �� India stillIndia still well below Brazil and China onwell below Brazil and China on

“Knowled“Knowledgge Econome Economyy Index” ofIndex” of World BankWorld Bank

�� FourFour Pillars of this Index:Pillars of this Index:

�� EconomicEconomic andand institutionalinstitutional regimeregime -- tarriffstarriffs regulatoryregulatorytarriffstarriffs,, regulatoryregulatory �� EconomicEconomic andand institutionalinstitutional regimeregime climate, rule of law, corruptionclimate, rule of law, corruption

�� Education and human resources -Education and human resources - literacliteracy,y, secondarsecondar yyyyy,y, school and college enrollmentschool and college enrollment

�� Innovation sInnovation syystem -stem - rresearchers in R&D,esearchers in R&D, ppatent aatent app’s’s approved by US, sci and tech articlesapproved by US, sci and tech articles

�� Information infrastructure -Information infrastructure - phonesphones and computers perand computers per 1000 people, internet users1000 people, internet users

��

28

4 - like China, running different economies4 - like China, running different economies India: no sign. improvements in 1 &India: no sign. improvements in 1 & 2, growth in 3 &2, growth in 3 &

��

gg

A t d l k tA t d l k t

Class Four, Part Two - Wrap-UpClass Four, Part Two - Wrap-Up

� Offshoring Drivers:Services 70%+ of US GDP; offsets US trade deficit in

� Offshoring Drivers: Services 70%+ of US GDP; offsets US trade deficit in� Services 70%+ of US GDP; offsets US trade deficit ingoods

� US now shifting R&D offshore – innovation effect?

� Services 70%+ of US GDP; offsets US trade deficit in goods

� US now shifting R&D offshore – innovation effect? � Drivers of Offshore Outsourcing:

� IT availability worldwide� Drivers of Offshore Outsourcing:

� IT availability worldwide � Low labor costs abroad� Availability of highly-educated labor� Low labor costs abroad � Availability of highly-educated labor � Foreign gov’t subsidies, weak regulatory regimes� Offshore partnering mechanisms now widespread� Foreign gov’t subsidies, weak regulatory regimes � Offshore partnering mechanisms now widespread

29

� Access to new and large markets� Access to new and large markets

yy

aa

Wrap-Up, Continued:Wrap-Up, Continued:pp p,p, �� Hira, Mann, SamuelsonHira, Mann, Samuelson–– new debate over whatnew debate over what

gglobalizationlobalization does todoes to the 200-the 200-yyear old economicear old economicgg doctrine ofdoctrine of comparative advantagecomparative advantage, where all, where all players win in tradeplayers win in trade �� Growth economics teaches thatGrowth economics teaches that innovation capabilityinnovation capability

is key to a nation’s growth.is key to a nation’s growth. ButBut withwith globalglobal marketmarket emergingemerging inin highhigh skilledskilled jjobsobs�� ButBut withwith aa globalglobal marketmarket emergingemerging inin highhigh skilledskilled jobsjobs,, including services, most of the USincluding services, most of the US workforce is inworkforce is in global competitionglobal competition, including its innovation capacity., including its innovation capacity.

�� Can one nation now quickly displace another’sCan one nation now quickly displace another’sinnovation capacity and soinnovation capacity and so capture its comparativecapture its comparativetradetrade advantageadvantage??tradetrade advantageadvantage??

�� Bhagwati:Bhagwati: “immiserating”“immiserating” –– wwhere high skill nationhere high skill nationlosesloses ffromrom sslashedlashed pricesprices resultingresulting ffromrom ttraderade // tthishis

30

loses from slashed prices resulting from trade / thisforces loses

downward wage competitionfrom slashed prices resulting from trade / this

forces downward wage competition

to o your mto o your m

d t d k l f ft d IT

d t d k l f ft d IT

on

on

gg

Services Wrap-Up, Continued:Services Wrap-Up, Continued: �� Raduchel:Raduchel: SoftwareSoftware is key to the way a modernis key to the way a modern

company deploys itscompany deploys its competitive advantagecompetitive advantage �� Software is now the heart of corporate valueSoftware is now the heart of corporate value �� But it’s not just the software, it’s the way you useBut it’s not just the software, it’s the way you use

softwaresoftware rganizerganize businessbusiness odelodelsoftwaresoftware toto organizeorganize youryour businessbusiness modelmodel

�� Freeman:Freeman: USUS losing talent base leadershiplosing talent base leadership

I dI d�� ii IInndidiaa ununddersersttananddss kkey roey rolle oe off soso ftftware anware andd ITIT services -services -

DevelopingDeveloping�� countriescountries historicallyhistorically focusfocusDevelopingDeveloping countriescountries historicallyhistorically focusfocus onon manufacturing,manufacturing, moving upscale from low to high endmoving upscale from low to high endmanufacturinmanufacturingg

�� India has a wholeIndia has a whole new modelnew model –– llow and high skill IT-ow and high skill IT-based servicesbased services

31

� World software power, then high end IT services power – a

�

t the center of corp. power worldwide?World software power, then high end IT services power – at the center of corp. power worldwide?

MIT OpenCourseWare http://ocw.mit.edu

Resource: Science Policy Bootcamp William Bonvillian

The following may not correspond to a particular course on MIT OpenCourseWare, but has been provided by the author as an individual learning resource.

For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.